The GBP/USD pair trades on a flat note near 1.3695 during the early Asian session on Monday. Traders weigh what a Federal Reserve (Fed) under Kevin Warsh might look like. The US ISM Manufacturing Purchasing Managers Index (PMI) report will be published later on Monday.
US President Donald Trump named Kevin Warsh to lead the US central bank. Markets anticipate Warsh may lean toward a smaller Fed balance sheet and hold the interest rate higher for longer, which provides some support to the US Dollar (USD) against the Pound Sterling (GBP)
“The reaction in the markets to Donald Trump’s nomination of Kevin Warsh to be the next Fed Chair is broadly consistent with our view that the president has made a relatively safe choice,” said John Higgins, chief markets economist at Capital Economics. “The perception seems to be that Warsh is not someone who is firmly in the president’s pocket and that he won’t contribute to a further undermining of the Fed’s independence and fears of currency debasement,” Higgins added.
Financial markets anticipate the Bank of England (BoE) to hold the interest rates at 3.75% at its February meeting. This expectation follows hotter-than-expected UK inflation data and strong Retail Sales figures. According to all but two economists polled by Reuters, the UK central bank will hold its benchmark interest rate at 3.75% at its February meeting, with only a small majority now expecting it to fall to 3.50% in March following a slowdown in better economic news. The expectation of BoE gradual rate cuts could lift the Cable against the USD in the near term.
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
